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What is a loan for Division 7A

Subsection 109D(3) gives the definition of what is a loan for the purposes of Division 7A.

It has some pretty obvious definitions (“an advance of money” and “a payment of an amount … if there is an express or implied obligation to repay the amount”) and even has the wonderfully circular definition of “a transaction (whatever its terms or form) which in substance effects a loan of money”

A loan is a transaction which effects a loan… now that is helpful!

But there is one part of the definition of a loan that always worries tax nerds like me. The definition of a loan for the purposes of Division 7A also includes:

 (b) a provision of credit or any other form of financial accommodation

So what is a financial accommodation? It sound very broad, and often pretty scary…

This is the part of the definition of a loan that the Commissioner used back in 2009 to argue that unpaid present entitlement should be treated as loans under Division 7A. In his 2010 Ruling on this issue he stated the following about what is a financial accommodation (TR 2010/3)…

89. The term “financial accommodation” is not defined in the ITAA 1936. The word “other” in the phrase “or other form of financial accommodation” suggests that the provision of financial accommodation is not limited to situations where there is also the provision of credit.

90. The Australian Oxford Dictionary does not define the term “financial accommodation”. However it does define the words individually as:

financial … 1 of finance…

finance… 1 the management of (esp. public) money. 2. monetary support for an enterprise

accommodation… 3 a convenient arrangement; a settlement or compromise…

91. Similarly, the Macquarie Dictionary does not define the phrase “financial accommodation” but defines the words individually as:

Financial … 1. relating to monetary receipts and expenditures; relating to money matters; pecuniary…

Accommodation … 1. the act of accommodating … 5. anything which supplies a want; a convenience … 7. readiness to aid others; obligingness. 8. a loan or pecuniary favour …

92. Combining these two definitions indicates that the phrase “financial accommodation” could be, at its widest, a reference to any monetary supply or monetary arrangement or, more narrowly, a reference to a supply or grant of some form of pecuniary aid or favour.

So what other than an unpaid present entitlements could be a financial accommodation? What if guarantees and securities were loans under Division 7A due to them being a “financial accomodation”? How would you value a guarantee and how would you repay it?

There are a lot of “what ifs?”, but in paragraph 5 of the same Ruling (TR 2010/3) the Commissioner states that the definition of a loan in subsection 109D(3) includes:

“the provision of credit or any other form of financial accommodation, in the context in which it appears being the supply or grant of some form of pecuniary assistance or favour, under a consensual agreement where a principal sum or its equivalent is ultimately payable…

It appears something has to be eventually payable for the Commissioner to consider it to be a Division 7A loan as it is a financial accomodation. For something like a guarantee you hope it is never called on so nothing is payable so it looks like this will never be a Division 7A loan.

What this means is the Commissioner is treating a “financial accommodation” by considering future cash flows, and where there is no such future payment it won’t be a loan under Division 7A.

Last thought… No one was ever going to pay the unpaid present entitlements so does that mean they should not have been treated as loans under Division 7A? I can see the Commissioner shaking his head as I argue this with him…

By Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.

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